The Major Retirement Planning Mistakes

Much has been written about the classic financial mistakes that plague
start-ups, family businesses, corporations, and charities. Aside from these
blunders, there are also some classic financial missteps that plague
retirees.

Calling them “mistakes” may be a bit harsh, as not all of them
represent errors in judgment. Yet whether they result from ignorance or fate,
we need to be aware of them as we plan for and enter retirement.

Leaving work too early. As Social Security benefits rise about 8% for every
year you delay receiving them, waiting a few years to apply for benefits can
position you for greater retirement income. Filing for your monthly benefits
before you reach Social Security’s Full Retirement Age (FRA) can mean
comparatively smaller monthly payments. The FRA varies from 66-67 for people
born between 1943-59. For those born in 1960 and later, the FRA is 67.1,2

Some of us are forced to make this “mistake.” The Center for Retirement
Research at Boston College says 56% of men and 64% of women apply for Social
Security before full retirement age. Still, if you can delay claiming Social
Security, that positions you for greater monthly benefits.1

Underestimating medical bills. In its latest estimate of retiree health care costs,Fidelity Investments says that a
couple retiring at 65 will need $275,000 to pay for future health care costs. That
estimate may be conservative, as Fidelity’s calculation does not include eye
care, dental care, or long-term care expenses.3

Taking the potential for longevity too
lightly. Actuaries at the Social
Security Administration project that around a fourth of today’s 65-year-olds
will live to age 90, with about one in ten living 95 years or longer. The
prospect of a 20- or 30-year retirement is not unreasonable, yet there is still
a lingering cultural assumption that our retirements might duplicate the
relatively brief ones of our parents. The American College New York Life Center
for Retirement Income recently polled people about longevity, and 47% of
respondents over age 60 underestimated the remaining life expectancy for an
average 65-year-old male.4

Withdrawing too much each year. You may have heard of the “4% rule,” a popular
guideline stating that you should withdraw only about 4% of your retirement
savings annually. Many cautious retirees try to abide by it.

So, why do others withdraw 7% or 8% a year?In the first phase of retirement, people tend to live it up; more
free time naturally promotes new ventures and adventures and an inclination to
live a bit more lavishly.

Ignoring tax efficiency & fees. It can be a good idea to have both taxable and
tax-advantaged accounts in retirement. Assuming your retirement will be long,
you may want to assign this or that investment to its “preferred domain” – that
is, the taxable or tax-advantaged account that may be most appropriate for it as
you pursue a better after-tax return for the whole portfolio.

Many younger investors chase the return.Some retirees, however, find a shortfall when they try to live on
portfolio income. In response, they move money into stocks offering significant
dividends or high-yield bonds – which may be bad moves in the long run. Taking
retirement income off both the principal and interest of a portfolio may give
you a way to reduce ordinary income and income taxes.

Fees have an impact. The Department of Labor notes that a 401(k) plan
with a 1.5% annual fee will eventually leave a participant with 28% less money
than one with a 0.5% annual fee.5

Avoiding market risk. Equity investment does invite risk, but the reward
may be worth it. In contrast, many fixed-rate investments offer comparatively
small yields these days.

Retiring with big debts. It is hard to preserve (or accumulate) wealth when
you are handing portions of it to creditors.

Putting college costs before retirement
costs. There is no “financial aid”
program for retirement. There are no “retirement loans.” Your children have
their whole financial lives ahead of them. Try to refrain from touching your
home equity or your IRA to pay for their education expenses.

Retiring with no plan or investment
strategy. An unplanned retirement may
bring terrible financial surprises; the absence of a strategy can leave people
prone to market timing and day trading.

These are some of the classic retirement
planning mistakes. Why not plan to
avoid them? Take a little time to review and refine your retirement strategy in
the company of the financial professional you know and trust.

This material was prepared by MarketingPro,
Inc., and does not necessarily represent the views of the presenting party, nor
their affiliates. This information has been derived from sources believed to be
accurate. Please note - investing involves risk, and past performance is no
guarantee of future results. The publisher is not engaged in rendering legal,
accounting or other professional services. If assistance is needed, the reader
is advised to engage the services of a competent professional. This information
should not be construed as investment, tax or legal advice and may not be
relied on for the purpose of avoiding any Federal tax penalty. This is neither
a solicitation nor recommendation to purchase or sell any investment or
insurance product or service, and should not be relied upon as such. All
indices are unmanaged and are not illustrative of any particular
investment.